How Much Can You Afford?

• When you apply for a mortgage, banks will generally use two ratios to determine how much your monthly payment can be. The first ratio compares your income to your mortgage payment. In general, banks do not allow your mortgage payment to be more than 28 percent of your income. The second ratio compares all debt payments you have to make to your total income. This is generally limited to 36 percent. In addition to these ratios, consider how much of a down payment you can make on the house. If you cannot put down at least 20 percent of value of the home, you will have to pay private mortgage insurance. This is an extra charge that is added to your monthly payment until you have at least 20 percent equity in the home.
  
  

Paying Points

• There are two types of points that individuals pay at the time the loan is issued. Each point represents a cost of 1 percent of the amount of the loan. Origination points are those that are paid to cover the bank's costs in issuing the loan and are generally mandatory. Discount points can reduce the interest rate on the loan and are generally optional. Each discount point you pay will generally reduce the interest on the account by 0.25 percent. To determine whether you should pay points, ask the banker how much paying points would decrease your monthly payment. Then, divide the cost of the points by the decrease in the monthly payments. This is how long you would have to stay with your current mortgage to have the benefits meet the costs of the points. Usually, if it takes about five years if you are planning to refinance or move within that time period, points are probably not in your best interest. However, if you plan to continue to pay off your mortgage for more than a decade, it is usually worthwhile to pay points.
  
  

Check Your Credit Score

• Before you apply for a loan, check your credit score because your credit score has a major impact on if you get approved for the loan as well as your interest rate. You are entitled by law to a free copy of your credit report each year, but you will have to pay extra if you want to see your credit score. When you look at your report, make sure all of the account information is accurate and there is no negative information that is incorrect. If you find errors in your credit report, write to the credit bureau stating your dispute and include copies of any evidence you have to support your claim. Credit bureaus are required to investigate within 30 days, so you will generally know if your claim was upheld in two months.